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Ireland International Focus

Lowtax Editorial
25 June, 2014


Although one of the European Union’s smaller member states in terms of population, Ireland is one of its most important business and finance hubs and the jurisdiction of choice for US companies investing into Europe. This feature explores Ireland’s business and tax environment.


Introduction

The island of Ireland lies to the west of England and Wales. The Irish Republic occupies 83 percent of the land area of the island, 70,282 sq km.

Ireland has a population of over 4.7 million (July 2013 est.); the capital, Dublin, has a population of more than a million and has evolved over recent years into a lively and cosmopolitan city with a thriving cultural life. Irish is the official language, but in practice English is the everyday language.

Apart from Dublin, the main cities are Cork, Galway and Limerick. There are international airports at Dublin, Shannon and Cork. Dublin serves more than sixty foreign destinations, the vast majority of which are in the EU.


Government

The Republic of Ireland is a democratic republic, and a member of the European Union (since 1973). The Constitution of 1937 established a bi-cameral legislature consisting of a lower house (the Dail, 100 percent elected) and an upper house (the Seanad, part-elected and part-nominated). The Head of State, with a largely ceremonial role, is the President, elected by popular suffrage for a period of seven years. The model of executive government is quite similar to that of the UK, with a party system, a Prime Minister (Taioseach), a cabinet of ministers appointed from elected politicians, and an independent civil service. The most recent elections for the House of Representatives, in February, 2011, elected the centre-right Fine Gail to power with 45.8 percent of the vote. Other parties contesting the election included: the Labor Party (22.3 percent), Fianna Fail (12 percent), Sinn Fein (8.4 percent). Independents took 7.8 percent of the vote.

In a referendum in June, 2008, Ireland rejected the new EU Lisbon Treaty due largely to fears about its tax sovereignty; the text of the treaty was finally approved in a second referendum in October 2009.


The Economy

Ireland is a small, modern, trade-dependent economy. Ireland was prosperous, due at least in part to the energetic pro-business stance of successive governments, but did not escape the global downturn in 2008 and was one of the EU countries worst hit by the economic recession in 2009. GDP growth averaged 6 percent in 1995-2007, but economic activity has dropped sharply since the onset of the world financial crisis. 

Ireland entered into a recession in 2008 for the first time in more than a decade, with the subsequent collapse of its domestic property market and construction industry. Property prices rose more rapidly in Ireland in the decade up to 2007 than in any other developed economy. Since their 2007 peak, however, average house prices have fallen 47 percent. In the wake of the collapse of the construction sector and the downturn in consumer spending and business investment, the export sector, dominated by foreign multinationals, has become an even more important component of Ireland's economy. Agriculture, once the most important sector, is now dwarfed by industry and services. 

In 2010, the budget deficit reached 32.4 percent of GDP - the world's largest deficit, as a percentage of GDP - because of additional government support for the country’s deeply troubled banking sector. In late 2010, the former Cowen government agreed to a USD92bn loan package from the EU and International Monetary Fund (IMF) to help Dublin recapitalize its fragile banking sector and avoid defaulting on its sovereign debt. Since entering office in March 2011, the new Kenny government has intensified austerity measures to try to meet the deficit targets under Ireland's EU-IMF program.

Ireland has grown slowly since 2011, but managed to reduce the budget deficit to 7.2 percent of GDP in 2013. In late 2013, Ireland formally exited its EU-IMF bailout program, benefiting from its strict adherence to deficit-reduction targets and success in refinancing a large amount of banking-related debt.

The Irish currency is now of course the euro, but its 'legacy' currency is the Irish Pound, managed until 1999 by the Irish Central Bank. Ireland has no exchange controls.


Business Environment

Ireland offers an excellent business infrastructure with good telecommunications; this coupled with the widespread use of the English language, membership of the EU, and a legal system largely based on English law makes the country a very convenient and effective business base.

Dublin, the administrative capital, is also the chief business centre and has the main international airport, although Cork, with its port, and Shannon, with another international airport and the Shannon Free Zone, are also significant in business terms.

There was already a reasonably strong domestic financial sector when the International Financial Services Centre (IFSC) was launched in 1987 as a quasi-'offshore' development zone. The IFSC has been extremely successful, and now hosts large numbers of banks, insurance companies, securities firms and investment funds. With the IFSC, Ireland has challenged Luxembourg as an 'offshore' financial centre within the EU. However, the IFSC fell foul of the EU's drive against 'harmful tax competition' and its favourable tax regime has had to be phased out.


Multinationals and Foreign Investment

It is widely believed that there is a strong link between Ireland's low corporate tax (see below) and its relatively high levels of foreign investment, especially from US companies. This was demonstrated again last year when, according to investment promotion agency IDA Ireland, 164 projects were won for Ireland, with 78 coming from companies investing in Ireland for the first time. The agency attributed these impressive figures to Ireland's tax policies and suggested that Ireland's corporate tax "will remain a source of competitive advantage between competing FDI offerings".

Figures for American investment in Ireland are also impressive. According to the American Chamber of Commerce in Ireland, over 115,000 people are directly employed in over 700 US firms in Ireland accounting for over 70 percent of all IDA supported employment. Collectively US companies have USD204bn in foreign direct investment (FDI) in Ireland. This represents 9 percent of all US investment in the EU & 4.5 percent worldwide. This equates to more than the total invested in the much hyped BRIC economies (Brazil, Russia, India, China) or all of South America. During the decade to 2010, US investment in Ireland was three times that invested in China.

The US accounted for 72 percent of Ireland's inward investment in 2013. Analysed at a sector level, Ireland is the number one location worldwide for US FDI in the chemicals sector, which includes pharmaceuticals and second worldwide in the information sector.

US firms contribute EUR3bn to the Irish Exchequer in taxes and an additional EUR13bn in expenditure to the Irish economy in terms of payrolls, goods and services employed in their operations.


Business Sectors

Investment Funds

As an EU member with a recognised stock exchange, a good network of double tax treaties, and favourable tax rules, Ireland has been successful at attracting mutual fund and investment fund business, even if it is not quite in the same league as Luxembourg: as of December 30, 2013, the Irish Stock Exchange had 803 funds, 1,549 sub-funds and 7,130 fund classes listed. The exchange has actively encouraged the fund market to make up a short fall in more traditional business.

Ireland has implemented the EU UCITS directive. Other than for UCITS funds, funds of funds are permitted within limits, and umbrella funds are allowed for all types of vehicle. There are no restrictions on the domicile of funds to be listed, but retail funds must be domiciled in 'recognised' jurisdictions, which for the ISE means EU countries, the Channel Islands, the Isle of Man, Hong Kong and Bermuda; or at the discretion of the ISE they can be admitted if they are subject to an equivalent level of regulation.

About 40 percent of the funds listed on the stock exchange are also domiciled in Ireland, many of them in the IFSC.


Banking

The Irish Financial Services Regulatory Authority (IFSR) took over bank regulation from the Central Bank in 2003. However, since the introduction of the Central Bank Reform Act in October, 2010, bank regulation reverted back to the Central Bank of Ireland. 

The Central Bank Reform Act, 2010, is now responsible for both central banking and financial regulation. This new structure combines the previous related entities of the Central Bank, the Financial Services Authority and the Financial Regulator.

Banks need licences from the Central Bank, unless they are already authorised in an EU member state under the Second Banking Directive 89/646/EEC, in which case they have to comply with certain administrative and information requirements. A non-EU bank will need to have an Irish subsidiary in order to apply for a license.

In early 2009, in response to the global credit crunch, the Irish government announced its decision after having consulted with the Board of Anglo Irish Bank Corporation plc, to take steps that enabled the bank to be taken into public ownership.

In February 2010, the European Commission announced that it had approved, under EU state aid rules, the establishment of the National Asset Management Agency (NAMA), an impaired asset relief scheme for financial institutions in Ireland.

The purpose of NAMA is to restore stability to the Irish banking system by allowing participating financial institutions to sell to the agency assets whose declining and uncertain value is preventing the long-term shoring-up of the financial institutions' capital and, therefore, the return to a normally functioning financial market.

The scheme was open to all systemically-important credit institutions established in Ireland, including subsidiaries of foreign banks. Five institutions participated: Anglo Irish Bank, Allied Irish Bank, Bank of Ireland, Irish Nationwide Building Society and Educational Building Society.

By the end of 2011, a total of EUR74bn in loans had been transferred to NAMA by the five participating institutions and EUR31.8bn has been paid as consideration to the institutions, an overall discount of 57 percent.


Insurance

Insurance business in Ireland (including captive insurance) is regulated by the Central Bank of Ireland since October, 2010. Following the 1994 implementation of the EU Insurance Framework Directives, there is a 'single passport' regime in effect for EU insurance companies, and they can commence business in Ireland, as elsewhere, subject to a notification procedure and the annual filing of accounts with the Registrar of Companies.

However, the captive insurance sector in Ireland has taken root in the IFSC in Dublin, where substantial tax advantages have traditionally been available to companies who obtain certification.

Captives (or other insurers) based in Ireland can take advantage of almost 70 double tax treaties

As of 2012, there were 101 licensed captives in Ireland, the fourth-highest tally in Europe.


Aircraft Leasing

With its favourable corporate tax environment, wide network of double tax treaties and the asset of the IFSC, Ireland has continued to establish itself as a major jurisdiction for aircraft leasing, attracting such notable names as Airbus Industrie which runs its main aircraft leasing operation from Dublin.

Activities performed within operations range across a broad spectrum and include sales, remarketing and lease placement, financing operations, acquisition and management, transaction negotiation, execution and deal structuring and technical services including Irish aircraft registration.

More than 30 aircraft lessors are based in Ireland managing about half of world’s commercial aircraft fleet. Nine of the world’s 10 largest aircraft leasing companies are located in Ireland.

Ireland-based aircraft leasing companies manage USD150bn in assets accounting for 19 percent of the global fleet (19,000 aircraft).


Film Finance

Ireland has seen considerable success in encouraging film production through a combination of subsidy programmes and tax breaks.

The audio visual content production sector in Ireland itself is estimated to be worth over EUR550m and employs over 6,000 individuals, with over 560 small- and medium-sized enterprises operating in the sector.

In 2012, there were 22 feature film projects produced in Ireland, 12 of which were official international co-productions. These film projects attracted over EUR55m in International finance, and accounted for over EUR25m in Irish expenditure in 2012.

Ireland’s ‘Section 481’ film and television tax incentive provides tax relief towards the cost of production of certain films up to 80 percent of the cost of production for all budgets up to the cap of EUR50m. Individual and corporate investors are also able to claim 100 percent tax relief on their investment, up to certain limits.

The Section 481 film tax relief will end in 2016, when new incentives will enter into force.


Corporate Taxation

Corporation tax is levied under the Taxes Consolidation Act 1997. Resident companies pay corporation tax on their worldwide income; non-resident companies carrying on business in Ireland are liable to corporation tax on their Irish-sourced income only. Equivalent rules apply to capital gains; however there are roll-over exemptions available for capital gains.

Until 1998 the standard rate of corporation tax in Ireland was 32 percent. Following the Irish Government's agreement with the EU for a general rate of 12.5 percent to apply from 1st January 2003, the rate to be applied to trading income fell in stages between 1999 and 2003.

Although the 12.5 percent rate has come under fire from several quarters, most notably those within the European Commission intent on creating some form of harmonised European corporate tax base, it is viewed by the Irish government as a cornerstone of the Republic's economic success, and is unlikely to be surrendered without a long and bitter fight.

The Finance Act 1999 introduced a withholding tax for dividends paid by all Irish companies except collective investment undertakings (UCITS) at the rate of 24 percent, reduced to 20 percent in 2007; however, dividends to EU 10 percent parents of Irish companies escape withholding tax under the parent/subsidiary directive. There are a number of other exemptions, subject to quite complex rules, but which in general terms exempt payments made to individuals and some companies in countries with which Ireland has double tax treaties.

Withholding tax on interest paid to non-residents is 20 percent, unless reduced under the EU interest and royalties directive, or under a tax treaty. Withholding tax on patent royalties is 20 percent, but all other royalties are exempt from tax. The 20 percent rate may be reduced under a tax treaty or exempt under the EU interest and royalties directive.

The Employment and Investment Incentive (EII) allows an individual investor to obtain tax relief on investments up to a maximum of EUR150,000 (USD206,799) a year in each year, until 2020. Relief is initially available to an individual at up to 30 percent. An additional relief of up to 11 percent is available on certain conditions.

In March 2014, the Government announced a consultation on the future of the EII scheme and three other tax reliefs: the Seed Capital Scheme which encourages individuals in pay-as-you-earn (PAYE) employment, together with the unemployed to invest in their own start-up company; the Special Assignee Relief Programme, introduced in Budget 2012 for an initial three-year period and designed reduce the cost to employers of assigning overseas-based individuals within their companies to positions in their Irish-based operations; and the Foreign Earnings Deduction which offers a deduction of up to EUR35,000 against income tax to individuals who travel to carry out the duties of their office or employment in certain foreign countries. Finance Minister Michael Noonan will consider the findings and recommendations on each scheme in the context of his 2015 Budget.

In June 2014, the Irish Government announced an increase in the top tax rate payable on offshore petroleum exploration and production, to ensure that the State reaps more of a financial benefit from future licenses.


Tax Agreements, Transparency and BEPS

Ireland has comprehensive double taxation agreements in force with 68 countries; a further three are awaiting ratification at time of writing. The agreements generally cover income tax, corporation tax and capital gains tax (direct taxes).

Almost all of Ireland's treaties provide for nil withholding tax on interest paid to a treaty partner, either unconditionally or on certain types of interest only. Exceptions are treaties with Australia, Chile, Israel and Turkey that provide reduced, but not nil rates for interest payments. Many of Ireland’s tax treaties also exempt royalty payments made by Irish companies from withholding tax.

In June 2014, Ireland's revenue agency launched a dedicated Automatic Exchange of Information (AEOI) webpage containing information and links to documents on a range of initiatives. In unveiling the page, Revenue said that Ireland fully supports the global move towards AEOI.

The page provides guidance on the Intergovernmental Agreement reached with the United States in December 2012 to improve international tax compliance and implement the Foreign Account Tax Compliance Act.  It provides for a bilateral and reciprocal exchange of information in relation to accounts maintained in Irish financial institutions by US persons, and deposits in US financial institutions by Irish residents.

The webpage also points out that Ireland is one of more than 40 countries to have committed to the early adoption of the Common Reporting Standard, approved by the Organisation for Economic Cooperation and Development (OECD) for the automatic exchange of financial account information. 

The webpage also contains information on the original and amended EU Savings Directive (EUSD). The EUSD has been in force since 2005 but is in the process of being amended to close existing loopholes and better prevent tax evasion. Webpage users can also access the EU Directive on Administrative Cooperation. 

In May 2014, the Irish Government launched a consultation on how the country's domestic tax system might best respond to a changing international tax environment and the OECD’s ongoing work on base erosion and profit shifting (BEPS).

As part of his Budget 2015 preparations, Finance Minister Michael Noonan is examining ways in which the competitiveness of Ireland's regime can be enhanced and its reputation protected.

The consultation document explains that although the OECD is conducting its own consultation process, a separate consultation on the implications of the broader BEPS project in the Irish context is considered necessary because domestic tax reforms may be needed.


Personal and Other Taxes

In Ireland the main tax on individuals is income tax. There is also capital gains tax, capital acquisitions tax (which includes inheritance tax), property taxes and stamp duties on transfers of various types of property. As a member state of the EU, Ireland levies VAT. From January 1, 2012, the VAT rate is 23 percent, up from 21 percent previously.

In Ireland the taxation of individuals is based on a mixture of the concepts of residence and domicile.

As in many countries, residence is consequent on presence in Ireland for more than half of a tax year, or for 280 days in two consecutive years. An individual's domicile is in the country where he maintains his permanent home, in the country where he regards himself as belonging. Domicile in Ireland is acquired from an Irish-domiciled father, but can be changed to another country by establishing a life there. Resident foreign employees will thus not normally be domiciled in Ireland.

An individual resident and domiciled in Ireland pays tax on his world-wide income; an individual resident but not domiciled pays tax on his foreign income only if it is remitted to Ireland. A non-resident individual pays income tax only on Irish-sourced income, and is liable to capital gains tax only on gains arising in Ireland or remitted to Ireland, unless he is domiciled in Ireland in which case he is liable on all capital gains.

The standard rate of Irish income tax for individuals in 2014 is 20 percent on the first EUR32,800 of taxable income, rising to 41 percent on the balance. For a married couple (one earner), the 20 percent band is increased to EUR41,800. For a married couple with two earners, the increase in the standard rate tax band is restricted to the lower of EUR23,800 in years 2013 and in 2014 or the amount of the income of the Spouse or Civil Partner with the lower income. The increase is not transferable between Spouses or Civil Partners.

Income is comprehensively defined and includes employment income and benefits, income from property, income from a trade or profession, and investment income.

Ireland operates a self-assessment scheme for income tax, except in relation to employees, whose tax is deducted through a PAYE-style scheme by their employers. The fiscal year is the calendar year.

In the 2009 budget an income levy was introduced as part of the Government’s austerity plans. From May 2009 the rate started at 2 percent on income up to EUR75,036, rising to 4 percent on income between EUR75,037 and EUR174,980 and 6 percent thereafter. The first EUR15,028 was exempt from the levy. The income levy was abolished with effect from January 1, 2011.

From January 1, 2014, the Deposit Interest Retention Tax imposes a withholding tax of 41 percent on all payments of interest made on deposits.  For 2013, the rates were 33 percent for ordinary deposit accounts and 36 percent for long-term deposit accounts.

The Universal Social Charge (USC) is a tax payable on gross income, including notional pay, after any relief for certain capital allowances, but before pension contributions. From 2012, the USC is charged at 2 percent on the first EUR10,036 of income, 4 percent on the next EUR5,980 and 7 percent on the balance.

Pay-Related Social Insurance is payable by employees and employers at the following rates: the employee pays 4 percent on all earnings if they earn more than EUR352 per week; the employer pays 8.5 percent on earnings up to EUR356 per week and 10.75 percent on earnings exceeding this amount. The rules are complex, however.

Non-Irish nationals can obtain exemption from social insurance contributions if they work temporarily in Ireland (for EU nationals, they must demonstrate that they continue to pay such contributions in their home state).

A domicile levy is charged on an individual who is Irish-domiciled, whose worldwide income exceeds EUR1m, whose Irish property is greater in value than EUR5m and whose liability to Irish income tax in a relevant tax year was less than EUR200,000. The amount of the levy is EUR200,000 and is payable annually.




 

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